This post is in response to the question “Is the United States in a bubble? If so, what events led to the bubble?” posed by @haydenhirzel12
What Are Financial Bubbles?
Troy Segal (2021) on in an article titled “5 Stages of A Bubble” states that bubbles are situations in which “the price for something... exceeds its fundamental value by a large margin.” Bubbles are unfortunately unpredictable but share certain similar characteristics of growth. New markets or opportunities start out small and gradually grow, once people take notice of profits being earned more interest is turned towards them, inflating them further. Prices skyrocket until they reach a peak and then people start to withdraw their investments, taking out the profits that they have earned. Often, after this, instead of a gradual decline, a bubble will be triggered by an event leading to drastic drops in price and a market in which supply is excessively greater than demand.
Is the U.S. in a Bubble?
According to my research, there is conflicting information as to if the United States is currently in another bubble. I am not an expert on this subject by any means, but I can agree that the Covid-19 pandemic has caused massive changes in the U.S. economy that have led to uncertainty in some areas.
According to Paulina Likos (2021), when the government enacted policies meant to stimulate the economy in the aftermath of the Covid-19 pandemic, stimulus payments “flowed into the markets and consumers pocketbooks” while the Fed’s balance sheet expanded, both leading to increases in assets. This has led to concerns that there is increasing instability in the stock market, housing market, and bond markets, leading some to believe that bubbles might be occurring in all these industries (Likos, 2021). Additionally, there is increasing concern about the growing price of cryptocurrencies, leading some to speculate that this is another potential bubble (Karabell, 2021).
Might Be Too Soon To Tell
Since March 2020, the stock market has already experienced the inflating and deflating of small investment bubbles in terms of Fortune 500 companies stock prices (Karabell, 2021). Additionally, Karabell (2021) states that “American’s have been saving like it’s the Great Depression” implying that people are saving more than they would normally be investing at such a high rate of growth, leading to conservatism in investing by some.
This all leads to the conclusion that we are living in a time of unprecedented uncertainty. While it is certainly useful for economics, politicians, and the regular consumers to use historical analysis to predict possible paths that the economy could take in the aftermath of the Covid-19 pandemic, it is also difficult to do so. I believe the correct answer to this question is that we do not know yet.
Works Cited
Karabell, Z. (2021, March 8). Is the stock market in a bubble? Time. Retrieved November 16, 2021, from https://time.com/5944831/stock-market-bubble-analysis/.
Likos, P. (2021, September 17). Are stocks, real estate, and bonds in asset bubbles? USNewsMoney. Retrieved November 16, 2021 from https://money.usnews.com/investing/stock-market-news/articles/are-stocks-real-estate-and-bonds-in-asset-bubbles
Segal, T. (2021, August 26). 5 stages of a bubble. Investopedia. Retrieved November 16, 2021 from https://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp
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